Tuesday, 3 September 2013

Someone else is developing a housing headache, too...

God knows how many column inches have been given over to the problems our Reserve Bank faces in trying to control a strong housing market, without simultaneously driving the Kiwi dollar even higher. And it's not getting any easier, as an article in today's Herald points out: 'Houses for sale fall to record low'.

There hasn't been the same attention given to where the Reserve Bank of Australia finds itself with its housing market. Most of the coverage of its recent policy decisions has been about whether it needs to ease further, and if so by how much, in order to help the Aussie economy pick up from its current sub-par state (which is, in turn, a result of the progressive winding down of major resource investment projects).

In the RBA's latest set of monetary policy minutes, for example, housing didn't pose much of a worry: "Borrowing for housing had picked up, as had dwelling prices, and there had been an increase in leading indicators of dwelling construction, but to date this had been moderate rather than strong".
Increasingly, though, I'm coming to the view that the RBA is going to have exactly the same sort of issues we've got.

For a start, Aussie house prices are on the rise, as you can see for yourself here. The respected RP Data Rismark house price series is running 5.4% up on a year ago across the five state capital cities of Sydney, Melbourne, Perth, Brisbane and Adelaide. Perth (+9.4%) is understandable: even in this relatively late stage of the Aussie resource boom, the joint has been jumping. The Sydney market's +7.0% rise, however, looks rather more worrying, especially set against the background of a fairly ho-hum business cycle.

Like the RBNZ trying to figure out whether Auckland's hot market is a localised relative price movement (as I've argued before, most recently here, I think it is, mostly), or a symptom of nationally lax credit or over-easy monetary policy, the RBA is very shortly having to turn its mind to whether the Sydney market is a local supply-and-demand one-off.

At the moment I don't have a strong view, but there certainly is evidence that the market is becoming more speculative. For one thing, the latest (July) Aussie lending and credit statistics (which you can find here) show that year on year growth in lending to property investors (+5.4%) is the strongest component of lending, ahead of lending to owner-occupiers (+4.1%), and well ahead of 'other' personal lending (+1.1%) and lending to business (only +0.8%).

Other hard data also tends to show Aussie house prices on the frothy side. I've posted the OECD's measures of real house prices relative to trend before, and which show both Kiwi and Aussie prices well down the expensive side, so for a change here's the Economist's take (from its latest issue).

Whether you compare owning to renting, or house prices to family incomes, either way both New Zealand and Australia look on the pricey side.

And then there is the more qualitative stuff. There are things like this, as reported by the Sydney Morning Herald - 'Barangaroo apartments sell out'. Barangaroo is a thumping great commercial and residential redevelopment of part of Darling Harbour in Sydney. And yes, the apartments will be modern, brilliantly located, with great Harbour views, and there won't (apparently) be anything else like them coming on stream in the foreseeable future. But even though they are priced as you'd expect ( one-bedroom apartment, A$1 million, and so on up), every single one sold off the plans in hours.
Can you easily disentangle the one-off in Darling Harbour from the Sydney market generally? Or the Sydney market from the right stance for national monetary policy? No. Maybe it is all just a shortage of supply in a popular city, just as Auckland's market is.

But my guess is that, before very long, we're going to start hearing less from the RBA about supporting the local economy through its quietish patch, and rather more about reining in speculative housing purchases.

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